It’s time to sell your MSP—or so you think. You mulled it over, talked it through with your family and did your research. You also determined the value of your business. You probably based your valuation on something you read online or heard on a webinar. While there’s lot of information about MSP valuations, not all of it applies to your MSP.
TruMethods members contact me about their intentions of selling their businesses. When we get down to value, there’s always a bit of disappointment after I explain reality. Ultimately, your business is like anything else; it’s worth what someone is willing to pay—not the revenue multiple you heard on a webinar to determine your MSP’s value.
How You Should Value Your Business
I’ve sold and acquired MSPs. I’ve done M&A work for several TruMethods members, so I’ve seen valuations from many perspectives. For the majority of MSPs, it’s best to use a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). This is the best way for owners to measure company performance without having to factor in accounting and tax environments. Based on my own experiences with MSPs, depending on a several factors, MSP valuations can range anywhere from 3-10x EBITDA.
Here are some of the factors impacting your valuation:
- Net profit percentage: A 20% net profit company will command a higher multiple than a 15% company. Net profit percentage is an indicator of efficiency, scalability and return of future investment.
- Total profit: There is a different set a of buyers for a company that produces $1,000,000 of annual EBITDA than one that generates $300,000 of annual EBITDA. What does more EBITDA show? It usually means higher multiples.
- Trajectory: Growing companies are more valuable. A company with three years of 20% top and bottom line growth is more valuable than a company with slower growth even if they have the same annual EBITDA.
- Location: The market you’re in can be a positive or negative depending on who the buyer is.
- Customer base: One of the hardest and most expensive things to fix is customer revenue makeup. If seat price or average contract size is low, that really hurts value. If you have customers that make up 5% of your monthly revenue they may get carved out, so be careful before you take on the big whale that is 20% of your MRR.
- Revenue makeup: If you have a larger percentage of MRR at the right price, your business is much more attractive then a company with more non-recurring revenue.
There are many more factors to consider, but these will get you on the fairway. If you want the option to exit your business in the future, focus on the things that will ultimately build value, including adding new managed customers at the right prices, keeping ticket counts low and driving at least 20% net profit after true owner’s salary.
Be sure to properly vet any information being provided to you about determining the value of your business. There’s a lot of misinformation out there. Use the factors I provided above as a starting point. At the end of the day, remember what I said in the beginning about valuation: Your business is worth what someone is willing to pay.
